Think like an investor, not a speculator, to make money
August 11, 2024
One of comedian Jack Handey’s Deep Thoughts is: “A good way to threaten somebody is to light a stick of dynamite. Then you call the guy and hold the burning fuse up to the phone. ‘Hear that?’ you say. ‘That’s dynamite, baby.’”
Stock market volatility will likely escalate while the Fed wrestles with rate cuts, the U.S. faces a significant presidential election and unemployment creeps up as inflation creeps down. In this climate, the real question is how you don’t blow up your own portfolio.
The easy answer is to think like a true investor, not a speculator.
You may have received those phone calls from friends who couldn’t wait to describe their success in the last great investment craze but who also may not have heard the fuse burning in the background. Their stories can make you feel bad for missing out, but your own story can have a different happy ending.
Here is how to be an investor: Always match the risk you are taking with your time frame.
If you are a long-term investor, what happens over the next 20 days or even 20 weeks doesn’t matter as much as what happens over the next 20 years. Markets could go up and down daily. Markets have at least a 10% market correction sometime during most years. This volatility is your friend over long periods of time, especially if you are investing monthly in your 401(k) or 403(b) accounts.
So the risk you are taking over long time horizons is inflation, not volatility. The best way to tackle inflation is through investing in stocks.
Over shorter periods of time, your risk is volatility. If you are planning to spend money in three years or less, you should keep that in high-yielding savings accounts. According to research from the Capital Group, since 1927, markets were negative only 16% of the time over three years and 12% of the time over five years.
You make money by being an investor through the impact of time and compound interest. An 8% return would double every nine years. If you invested $1,000 up front and $100 a month for the next 30 years, growing at 8%, you would end up with close to $150,000 (on a $37,000 total investment).
Another way to be an investor is by investing in things that have a discernible value.
There are metrics that can determine how a stock or asset class is valued, based on how much you are paying for earnings, dividends or sales. Investors will pay more or less for those things based on their expectations of an unknown future, so disagreement on price exists, but price is ultimately based on fundamentals.
Things like Bitcoin or art or baseball cards may provide returns, but their value is harder to calculate, therefore making their prices fluctuate considerably and causing them to be more in the speculation, rather than investment, camp.
Investors are always making choices between saving for tomorrow or spending on today. You’re going to eventually spend or give away all your money. Given those choices, being a good investor means understanding the ultimate purpose of your money. When you eventually retire, you are trying to replace your spending, not your income. If you manage your spending, it will be easier when you retire — not only because you have taken advantage of time and compound interest, but because you won’t need to replace as much spending.
If you are too frugal, you may accumulate a lot of money, but you would not have invested in experiences or things or services that could enhance your life.
Our most challenging clients are those who spend too much and those who save too much, because money has a somewhat perverse hold on each of them. Just as one should develop skills around saving, you should also develop spending proficiencies. Setting goals for things that you want, investing for them and then eventually spending money on them increases the likelihood of feeling comfortable living off the assets you have built when retirement arrives.
Being an investor allows you to handle market volatility without blowing up your future.
- Ross Levin
This article originally appeared in the Minneapolis Star Tribune on August 11, 2024